In recent years, a small but growing number of economists have come to see that it is not so much the accumulation of more savings or capital that is the key to improving standards of living. Rather, it is innovation that drives a country´s long-run economic growth. Thus, Innovation has become the central driver of national economic wellbeing and competitiveness and this is why so many nations are placing innovation in its national economic growth strategy to make linkage between innovation and economic and employment growth. This is especially true for developed nations, which without innovation have a hard time competing with low-income, low-wage nations.
Innovation plays a central role in productivity growth in the new economy. As a result Innovation and productivity are the prerequisites for higher wages and expanded opportunities for workers. All of these nations have come to understand that relying on markets shaped by price signals alone will not usually be as effective as smart public-private partnerships in spurring higher productivity and greater innovation. They understand that government can and must play a constructive role in helping the private sector compete. Therefore, they see that promotion of innovation as a focal pint of their economic growth and competitiveness strategies.
Is innovation policy more than just science policy or just another name for industrial policy? Is growth best left to markets and private enterprise alone or does government play a role? And just what is the appropriate role of government in facilitation innovation, boosting productivity and driving competitiveness? All these questions can be addressed at different scales.
A nation’s human capital endowment—the skills and capacities that reside in people and that are put to productive use—can be a more important determinant of its long term economic success than virtually any other resource.
This resource must be invested in and leveraged efficiently in order for it to generate returns—for the individuals involved as well as an economy as a whole.
In his book The Wealth of Nations, released in 1776, Adam Smithe observed the appropriate role of the state in technology development and in fostering economic growth (see Nature and Causes of the Wealth of Nations). To illustrate government market engagement even then the attention of government was turned away from guarding against the exportation of gold and silver to watch over the balance of trade. The title of Mun’s book, England’s Treasure in Foreign Trade, became a fundamental maxim in the political œconomy, not of England only, but of all other commercial countries.
This made sense in the era before globalization, when production was largely contained within national borders and firms would export their goods and services to compete abroad.
Such as they were, Innovation policy involves the same set of policy issues that countries deal with all the time, but focuses on how countries can address those issues with a view toward maximizing innovation and productivity. To maximize innovation, nations must also find the right balance between the interests of present and future generation.
The cost of economic interactions has obviously changed dramatically through time, and part of the economic geography story is that these changes have been important in shaping the world economy. To be sure, price mediated markets are useful, but when it comes to innovation they are not enough. Therefore knowledge-based economy require sophisticated financial markets that can make capital available for private-sector investment , a sound banking sector, well-regulated securities exchanges, venture capital, foreign direct investment (FDI) and other financial products.
Some prominent economists are among the ranks of techno-pessimists, arguing that the role of technology is overstated, and that innovation is diminishing in advanced industrial societies. It´s bad enough that conventional economists give short shrift to innovation, they give little consideration to the role of government in spurring innovation. Endlessly repeating the mantra markets are best at allocating resources, most conventional economists, known as neoclassical economists, see government intervention as likely to hurt innovation and growth because, by definition, it distorts market-based allocation efficiency.
Therefore any discussion of innovation and innovation policy would not be complete without a discussion of economics and economists who dominate economic policy thinking in Anglo-Saxon nations are the most powerful intellectual force working against robust innovation policies. And, of course, economic policy is made in context of politics. Fundamentally, the neoclassical economics, for the majority of their claims are not science in the sense of physics or biology. But the economic, social, political, and strategic consequences of the transformation will ripple through governments at every level. Yet, there is dearth of planning or even due diligence by governments to develop an understanding of how emerging technologies such as robotics will change the way we work and will live in the future.
Instead, a large gap tends to exist between the scientific and technological community and the government making and implementing economic, urban, and foreign policies. To the extent that social scientist like Richard Florida admit (here) is that Robotics and fast approaching technology revolution will be an important part of the social and economic landscape of the future and the other components of the Third Industrial Revolution will largely be driven by the private sector. But the economic, social, political, and strategic consequences of the transformation will ripple through governments at every level. Others claim governments to prepare for, take advantage of, and mitigate the downside risk of these developments.
The true choice in innovation is not between government and no government, but about the right type of government involvement in support of innovation.
Innovation policy recognizes that while the private sector should lead innovation, in an era of globalized innovation and intensely competitive markets, governments can and should play an important enabling role. Even if there were not systemic market failures smart countries would still want innovation policies, if for not other reason than because addressing major complex and systemic challenges,such as providing universal and much better, less costly health care to growing and aging populations, combating climate change and environmental degradation, achieving sustainable energy production, and deploying complex digital infrastructures or organize their investment in scientific research in ways that also support technology commercialization and the innovation needs of industry.
Likewise, countries can organize their corporate tax systems simply to raise revenues, or to raise revenues in ways that also drive innovation and traded-sector competitiveness. They can set up their science policies just to support science and research-driven innovation and knowledge-based economy. The development and diffusion of knowledge-based economy is center stage in many fields of economics. Modern theories of growth and international trade, for instance, place little emphasis on the accumulation of tangible factors such as capital and labor, focusing almost entirely on access to knowledge. With the recent advances in communication technology, the access to knowledge is greater than it has ever been.
Which activities should be conducted as public services and which should be left to private firms is a question that is always relevant. A better frame, unregulated market acting alone, as this years awarded, Jean Tirole, for The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 shows, fails and is a subject to a vast array of market and network failures and often produce socially undesirable results. The merger of a firm and its supplier may encourage innovation, but may also distort competition. According to him “There are no simple, standard solutions for regulation and competition policy, as the most appropriate ones will vary from one market to another. It is not only monopolies that require regulation, oligopoly markets do too”. Jean Tirole has therefore also studied the conditions of specific markets, and contributed new theoretical perspectives.
Along with his co-authors, Triole paints a helpful picture of the appropriate relationship between government and business in specific markets areas. Tirole’s area of specialism is not new. Back to the Wealth of Nations in 1776, Adam Smith railed against the abuses of monopolies and cartels. But it is a highly relevant area of study for two reasons. The first is that many of the natural monopolies that were once state owned – power and water companies, for example – are now in private hands. The second is that there are some sectors which have grown in size and power in recent years, and where the risks to the public have become greater. Banking is one such sector.
Drawing on these new insights, governments can better encourage powerful firms to become more productive and, at the same time, prevent them from harming competitors and customers. “The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions
Several further comments are in order. One is that there are key digital platforms technologies with better market access (more consumers can be accessed at low cost today). Innovation in service has become increasingly important, as service industries now account for more than 80 % of the U.S. economy and 75 % or more of most European ones. Without “government” help to catalyze deployment of these platforms we will not see progress that is possible. In fact, a key reason why some Asian nations are ahead of us in deploying these platforms is that foreign governments have engaged in smart partnerships (external relations) to help the private sector build the platforms, in part by using a combination of tax incentives, smart, but limited, regulations that drive change and having the government act as a lead purchaser.
Thus, the understanding of innovation has broadened from a purely so scientific and technical focus to include the application and use of information. Many countries leverage IT to drive innovation in specific segments of their economies, such as health care. Overall, health and medical care and job creation are seen as the main priorities by most EU countries, with 16 Member States choosing job creation as their first priority and 10 countries selecting health and medical care. The cutting-edge research and innovation today is in fields like social media, big data, cloud computing, or the ‘Internet of things’: this is where European companies should now focus.
Ultimately, whether nations can engender a robust innovation economy or not hinger on whether they can master the innovation Triangle, which means getting the factors right to support a robust business environment, regulatory environment, and innovation policy environment.
Many countries are experimenting with measures to increase their R&D efficiency by using existing funding for scientific research to incent universities to focus more on technology commercialization. For example, in Sweden 10 percent of regular research funds allocated by the national government to universities are now distributed using performance indicators. Public R&D funding shows the commitment of a government to promoting research, development and innovation activities both directly and through the leverage effect on business R&D expenditure and most Member States have adopted their national R&D intensity target for 2020. Another key aim of public R&D funding and indirect support measures is to give the business sector incentives to engage in more R&D activities.
Some nations do well on one or even two of these factors, but not nation yet gets all three right. Funding in strong innovative performance means investing in the future. We owe it to Europe´s citizens who have continued to believe that EU is part of the solution, not the problem, to overcoming the crisis. This argument is also true for other areas in the future employment of promising young European scientist who represent the EU:s future. Following this path will enable the EU to grasp global opportunities, while at the same time offering sustainable employment opportunities with high quality jobs. The expansion of higher education discussed here, with a growing proportion of the population entering HEIs and completing degrees, means the quality and relevance of provision is more important than ever. The OECD’s Survey of Adult Skills (PIAAC), carried out in 2012 in seventeen Member States, captures the literacy and numeracy skills of 16 to 65 year-olds and as such reflects the human capital of each country’s adult population, that build the foundation for long-term economic growth of societies and social inclusion of individuals.
The most sophisticated countries recognize this. Their innovation strategies constitute a coherent approach that seeks to coordinate disparate policies toward scientific research, technology commercialization, investments, education and skills development, tax, trade, intellectual property (IP), government procurement, and regulatory policies in an integrated fashion that drives economic growth by fostering innovation.
Beyond policies aimed at enhancing Innovation and Entrepreneurship, which are two major drivers of competitiveness, many other EU policies- i.e. regional policy, competition, trade, taxation, etc, have also an impact on the business environment and enterprise performance of Europe. More generally, analysis of this paper by Daron Acemoglu Ufuk Akcigit (2011) suggests that a move to a richer menu of IPR policies, in particular, a move towards optimal state-dependent policies, may signi ficantly increase innovation, economic growth and welfare.
In this way we are looking at ideas and principles strong and pervasive enough to make governments continue with their policies, even though some have felt the most devastating economic failure recorded in modern history, and do make sense in their own terms.
Europe’s experience of recent years has been one of multiple and inter-related crises. A number of highly complex crises of confidence, undermining the trust of markets, citizens and global partners in the future of the euro and the EU itself: A competitiveness crisis illustrated by current account deficits in Europe’s periphery at the outset of the crisis and by a limited ability to adapt individual European economies to the challenges of a more competitive global environment; a growth and investment crisis involving structurally low levels of GDP growth; an institutional crisis characterised by the rising significance of national governments in EU policy-making, while responsibilities have been shifted to the Union without a parallel delegation of actual powers and resources to Brussels.
The fundamentals of the European project, such as the free movement of EU citizens, are also starting to be challenged even by mainstream European parties, while the debate on repatriation of powers and the balance between Member States’ and EU competences is growing. Increased political power of these anti-Europe parties could change the balance of power between EU institutions, lead to negative spill-over effects into national politics and endanger the EU infrastructure of rights and rule of law.
Under these conditions, Europeans have to face the challenges related to increasing global economic competition by individually and collectively preparing themselves for the transition of Europe’s economy. Thus, it is clear that in the next five years this new political leadership will be faced with a multitude of challenges. The list of immediate priorities is long: fostering growth, creating jobs, overcoming internal fragmentation, establishing an Energy Union, focusing on innovations that address the major societal challenges identified in Europe 2020, dealing with problematic neighbours, such as Russia, finding a way forward on the UK issue and completing the missing elements of EMU governance.
Allowing for flexibility while avoiding fragmentation is now a well-established approach within the EU. But it was not always so. Some have long advocated establishing a completely separate institutional framework for the eurozone.
the need to deepen the eurozone while maintaining the integrity of the EU as a whole. This will remain a critical issue in the near future, if only because of the uncertainty surrounding the United Kingdom’s status in our Union.
Speaking for Europe, at the State of Europe: “A new action plan for Europe”, Herman Van Rompuy answered that these sweeping worldwide changes matter much more than how we arrange our banking oversight or coordinate economic policies within the Union. New technologies, the ageing of our populations, the race for resources: for all our countries, these are the real challenges.
When it comes to our competitiveness as a continent, turning ideas into real business is at the heart of the matter
Recent figures make the problem strikingly clear. The EU-US productivity gap, which had started to narrow in the years before the crisis, is widening again. It means that compared to the United States our collective competitiveness is eroding. We need to work better with our international partners. That means opening access to our R&D programmes, while ensuring comparable conditions abroad. That also means adopting a common EU front where needed to protect our interests. This, in essence, is what innovation Union is all about.
Europe has a long history of world-changing inventions, including the printing press, the optical lenses used in microscopes and telescopes and the steam engine. But recently The three of the top 10 companies by market capitalization are technology companies founded in the last half-century: Apple, Microsoft and Google are American. In Europe, there are none among the top 10. Yet if any region of the world could compete successfully with the United States in technological prowess, it would seem to be Europe.
The European Union has venerable universities, a well-educated work force, affluent and technically skilled consumers and large pools of investment capital. But, there are cultural, institutional and structural barriers to innovation in Europe, like smaller pools of venture capital and rigid employment laws that restrict growth. Perhaps the most significant barrier are cultural. So it’s not a surprise that bankruptcy codes are far more punitive, in contrast to the United States, where bankruptcy is simply a rite of passage for many successful entrepreneurs.
An analysis of the trends since the start of the financial crisis in 2008 shows a recovery of R&D investments in the period 2010- 2012. However R&D investment by EU based companies slowed considerably in 2013 and was accompanied by a fall in sales. Meanwhile US companies appear more resilient. At the same time, over the past five years, the annual sales of typical ICT companies from the US and Asia went up by almost 50%, while those of European companies stagnated, or even went down in some cases. This is striking. In the history of communication technologies, there is a glorious tradition of innovation coming from Europe for the best part of the nineteenth and twentieth centuries.
Herman Van Rompuy argues that in a time of sweeping worldwide changes, Europe risks losing the competition race. He argues that the EU needs to focus on innovation, to turn ideas into real business and to develop digital technologies by addressing the problems regarding intellectual property, copyrights, market fragmentation, consumer protection, investment in infrastructure, venture capital for startups, and digital skills.
Europe also needs to focus not only on reducing production costs, Europe also needs to find ways to overcome its legitimacy deficit and come up with a shared vision for Europe’s future. The EU is already an economic and political reality. This requires solidarity and responsibility – in particular, solidarity from the Union’s more prosperous countries and responsibility on the part of those countries in need of reform. The Commission has been equally firm in demanding both. Europeans may be leaders in scientific excellence (as Nobel Prize winners regularly show), but compared to our competitors in the US, Japan or South Korea we find it more difficult to bring this research to the market. Many Asian nations (such as China), in contrast, faces the opposite challenge. If China is to ultimately thrive in the global innovation economy, it must enable individual freedom and focus more on the needs of the present generation.
Given these factors:
As Antoine de Saint-Exupéry once said: “A pile of rocks ceases to be a rock pile when somebody contemplates it with the idea of a cathedral in mind.” Such individual strokes of genius are indispensable for any nation to grow and prosper.
But nobody builds a cathedral alone; you build them as a society. Here also, it is a matter of improving conditions and opportunities.
A true recovery programme in times of change is necessary and urgent in euro zone Member States which are currently suffering intolerably high unemployment. This should go hand in hand with reforms to get more value for money and tackle fragmentation. Productivity-enhancing structural reforms in these countries must be combined with large investment in education and research, new technologies, networks, health, energy, environmental sustainability and the business environment, all of which would strengthen longer-term competitiveness.
In relation to United States over IP European academics are at a disadvantage side because there is less commercial pressure. As soon as they publish their ideas in Europe they cannot get patent protection, which means capital can’t be attracted – which means Europe has a lower transfer rate of ideas into creative jobs, business, the marketplace. The two factors that stand out are research commercialisation and ICT technologies. Innovations like better technology transfer from universities and placing strategic best to support potentially breakthrough technologies such as the internet, nanotechnology and human genome mapping or advanced batteries. Governments should support economic growth best by engaging factor conditions for innovation picking specific technologies which is tantamount to industrial policy. Google got of the ground, in part, funded Digital Library research grant from the National Science Foundation (NSF).
Neoclassical economist will certainly object this as a industrial policy process of picking winners. It is, insofar as it means government identifying industries and technologies broadly where the country needs to be more innovative and productive and then developing and implementing policies to work with the private sector to ensure that result. But this is not “industrial policy” in which the government selects specific firms or impedes beneficial market forces. In contrast, innovation policy is concerned with enhancing the strength of a nation´s innovation ecosystem. Indeed, government funding beyond support for basic research and procurement has played a key role in the technological advances that have sustained U.S. industry´s global predominance since WWII. As a result, government´s role in coordinating collaborations between private industry and publicly funded research in university and government laboratories has spilled far beyond the defense sector to include large parts of the civilian economy.
Europe has no shortage of potential. We have worlds leading researcher, entrepreneurs and companies and unique strengths in our values, traditions, creativity and diversity. We have regions amongst the most innovative in the world. Take Sweden and Denmark, which are particularly strong in life science and excels by the clarity of Nordic design; or Germany, with its cars and high-precision machinery, both in demand in emerging economies; or Italy, with its luxury brands and seducing belle cose. European brand is that of a certain way of life, of taste quality and style, of open social relations, of environmental protection, of a sense of progress. Individual countries offer fine examples. The countries of Europe are uniquely placed to shape change – both individually and collectively as a Union. Our diversity is an asset, our unity brings strength. In our Union, different degrees of cooperation and integration exist. Our enlargement policy continues to foster democracy and prosperity.
Yet we can and must do much better based on the policy features identified in Europe 2020. All our countries can draw strength from remaining true to themselves. A highly educated workforce, the singular alchemy of our prosperity, freedom and rule of law, the solidarity embodied in our social models: when combined, these are unrivalled assets. But, Europe will not emerge from the crisis by denying its true self. More now than ever before, our continent must be a synonym for innovation and quality. A more strategic approach would focus on boosting growth and jobs in Europe throughout the EU, such as by meeting the Europe 2020 targets for research, development, and innovation, investing in European success and advancing the Transatlantic Trade and Investment Partnership. This is not just about Europe’s economic wealth, but also about its political relevance on the global stage.